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But how does cryptocurrency lead to tax evasion?
Much of it comes down to lax reporting requirements, according to tax experts.
The IRS may not be able to trace crypto income or transactions if they are not reported by stock exchanges, companies, and other third parties. And that means the income cannot be taxed.
“No one has made clear rules about this, so there are a lot of non-reports,” according to Jon Feldhammer, partner at Baker Botts law firm and former senior IRS lawyer.
“Every time you create a no-report lane, you create a way to profit from tax evasion in a way that cannot be found or much more difficult to trace,” he said.
Crypto is quickly becoming an alternative to cash as more and more traders accept bitcoin and other virtual currencies as a means of payment. But cash is more heavily regulated.
For example, a business that receives more than $ 10,000 in cash from a customer must file a monetary transaction report. This can happen if a consumer buys a car for more than $ 10,000 in cash, someone wins big at the casino, or a bank receives a large cash deposit.
These reports tell the government that a buyer has a lot of money that may or may not be reported on a tax return.
But the same rules don’t apply to crypto. A used car business that receives $ 20,000 in bitcoins from a customer does not have to file a foreign currency transaction report; this income may also not be taxed if it is not reported on the business owner’s tax return, Feldhammer said.
“Although they represent only a relatively small share of corporate income today, cryptocurrency transactions are likely to gain in importance over the next decade, especially in the presence of a large regime of information on financial accounts, ”the Treasury report said.
Additionally, virtual currencies do not need to be bought or sold through an exchange, making these transactions more opaque to government officials.
Biden crypto proposal
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About 80% of the US “tax gap” is due to underreported income, mostly among the wealthy who hide their income in opaque structures, according to the Treasury Department.
Stricter reporting standards – including “full reporting” for cryptocurrency – are among the most effective ways to improve tax compliance, he said.
Biden’s tax program would treat crypto transactions like money, forcing companies to report when they receive more than $ 10,000 in virtual currency.
Financial institutions, payment settlement entities, and digital asset exchanges and custodians would also be required to report crypto transactions above a certain threshold, according to one. Analysis of the proposal published by the law firm Greenberg Traurig.
The IRS has already shown increased interest in learning more about taxpayer crypto activity – the agency asked a question about cryptocurrency holdings on page 1 of the 2020 tax returns.
Biden’s compliance program is expected to pass Congress. The total plan would raise $ 700 billion in the first decade and an additional $ 1.6 trillion in the second, according to the Treasury.
The White House would use these funds to pay for the measures of the American plan for families. This proposal includes additional funding for two years of free universal pre-kindergarten, two years of free community college, heavily subsidized child care services for middle-class families, federally paid family leave, and expanded child tax credits.